, Britain
A print firm in Salford with thirty-one years of trading behind it got a letter in November 2008. The overdraft was being reviewed. In January it was reduced, then converted to a loan with an arrangement fee, at a margin that was more than double what it had been.
Nothing had happened to the business. The order book was in reasonable shape, the customers were paying more or less on time, and the firm had been profitable in every one of the previous six years. The failure was several hundred miles away, in an institution the printer had never heard of, and it arrived through the post.
The failure was upstream and it came as a letter
The sequence is worth setting out, because the dates matter to how it felt.
Queues formed outside Northern Rock branches in September 2007 and the bank was taken into public ownership in February 2008. Lehman Brothers failed on 15 September 2008. Within days, HBOS was being merged into Lloyds TSB, and by 8 October the government had announced a recapitalisation of the British banking system.
For a small firm, none of this was visible until the bank's own position changed, and then all of it was visible at once. Banks that needed to shrink their balance sheets did it where shrinking was easiest, and the easiest place is a facility repayable on demand held by a customer with no negotiating power.
So the mechanism of 2008 was different from 1992. In 1992 the price of money went up. In 2008 the availability of money went away, and it went away from businesses that had done nothing to deserve it. The commonest form was not a refusal. It was a renewal on worse terms, an arrangement fee, a wider margin, a demand for more security, or a reduction in the limit that turned a working facility into a facility you had to plan around.
Base rate fell to nothing and your borrowing did not follow
The Bank of England cut Bank Rate six times in five months. It was 5% at the start of October 2008 and 0.5% by 5 March 2009, where it then stayed for years, with quantitative easing beginning that same month.
Anyone reading that from outside would assume borrowing became cheap. For existing tracker borrowing it did, and that mattered a great deal to firms and landlords who happened to hold one. For everybody else it did not, because the margin over base widened at roughly the pace the base fell, and because many facilities had a floor written into them.
A firm renewing in 2009 could very easily find itself paying more, in cash, on a smaller limit, with a base rate at a historic low. Explaining that to anyone who read the newspapers was impossible.
The security fell out from under the loan
The second mechanism was property, and it caught firms that had never thought of themselves as property businesses.
Commercial property capital values fell heavily from mid-2007 through to 2009, and the falls were worst in secondary stock, which is exactly what a small business owns: the industrial unit on the edge of town, the shop on a high street away from the prime pitch. A building that had been valued in 2006 to support a loan was worth far less by 2009.
That matters even when the rent is being paid, because commercial lending is written with loan to value covenants. A breach is a default. A default gives the lender the right to act, and in 2009 a number of perfectly solvent businesses found themselves in a lender's business support unit, paying fees, because a valuer had revised a number.
The same arithmetic worked through personal guarantees. A guarantee secured on the owner's house was worth less than it had been, which made the bank want more of it.
The state arrived late and sideways
Support existed and it was uneven. The Business Payment Support Service from November 2008 let firms arrange time to pay with HMRC, and that was probably the single most useful thing on offer, because the tax bill is the largest creditor most small firms have and it had previously been the least negotiable. VAT was cut to 15% from 1 December 2008 until the end of 2009, then went to 17.5% and to 20% in January 2011. The Enterprise Finance Guarantee from early 2009 underwrote a portion of lending to firms that lacked security, though it was a guarantee to the bank rather than to the borrower, and the borrower still had to satisfy the bank.
What followed was a decade that is now hard to read correctly. Rates stayed near zero until 2022. Firms that survived to 2010 with debt in place found it cheap for twelve years, which supported a lot of businesses that would not have survived normal rates, and which taught a whole generation of owner-managers that borrowing is cheap. That lesson expired rather suddenly.
Where this shows up in the game
In Business Baron an overdraft is repayable on demand and your bank manager is a named person with a risk appetite, a tenure and a memory. In 2008 his appetite changes for reasons that have nothing to do with your trading, and you get a letter. If you have been carrying the facility as though it were permanent working capital, that letter is the end of your company. If you have been keeping a thirteen week forecast and have somewhere else to go, it is a bad quarter.